We are Saving More - August 6, 2018

Posted By Loveless Wealth Management LLC on 06 August 2018

The second quarter GDP report included revisions in the data going all the way back to 1929. Included in the U.S. BEA’s report is consumer spending and personal income. The income component isn’t a part of GDP, but it was also subject to revisions.

I know, this a wonky way of beginning this week’s update, but bear with me. I’m going somewhere with this.

There were some tweaks to spending, but it’s the income portion of the data that saw a significant upward adjustment, thanks in part to upward revisions to business income and dividends (per U.S. BEA data).

Why do we care?

Because the significant upward revision to income, without a corresponding increase in spending, generated a sharp upward revision in the savings rate – from a paltry 3.2% in May to 6.8% in June.

Before I go on, a quick ‘how to’ is in order. The equation that spits out the savings rate is pretty straight forward.

Step 1: We take total after-tax income, subtract spending, and that gives us savings.

Step 2: Total savings divided by after-tax income = the savings rate.

Using June’s annualized numbers from the U.S. BEA: $1.049 trillion in savings divided by $15.52 trillion in after tax income = 6.8%.

While we’re not back at levels from earlier decades, the uptick is encouraging.

Greater savings can help finance loans for business, which fuels economic activity. It also helps ease the pressure of the expanding federal deficit, as savings may flow into Treasury bonds and T-bills. Or, it can aid consumer spending, which supports the economy.

By and large, this was an overlooked nugget in the just-released GDP report. But it’s encouraging news and worthy of a look.